With just weeks to go before the end of another financial year, it’s important to review your investment portfolio, and strategise how you can minimise your tax bill and maximise your long-term savings.
Speak to your property manager and be proactive. Apart from being smart practice, it is wise to view your investment property as a ‘small business’ and do what is strategically important to maintain and improve output and efficiency. Surprising your tenants with improvements can also have a positive relationship effect. Consider any repairs and maintenance issues you may have been putting off or not aware of.
Tax deductions are an important part of cash flow. The rent, tax deductions and your personal contributions, are all required in the holding phase of your investment while you wait for the capital appreciation to occur over time.
The rent is fixed by the market, so this is an appropriate time to check if the current rent is in line with market trends or if needs adjustment when the lease expires or renews.
Tax deductions are legitimate to claim as a property investor, however they are, on their own, not a reason to invest. The more rent and deductions you can achieve, the less you need to contribute out of pocket.
Having a strategy session with your accountant now will enable you to see if there are any benefits in bringing forward tax-deductible expenses to the current financial year or perhaps pre-paying interest. It is essential to get sound, qualified advice on these matters that are specific to your personal circumstances from a property savvy accountant.
Repairs and maintenance vs improvements
It is important to understand the difference between repairs and maintenance and improvements to a property. This is relevant as you can claim an immediate deduction on repairs and maintenance if the property is rented, whereas improvements must be depreciated over time.
A repair is when you return something to its original state e.g. replacing damaged hot plates on a stove top.
Maintenance is money spent to prevent or fix deterioration like oiling a deck, painting etc.
An improvement is making something better than it was originally. For example, replacing an old oven to update a kitchen, often resulting in being able to ask higher rent or installing ducted airconditioning to replace split systems.
Generally, you can claim an immediate deduction on repairs and maintenance whereas, with improvements, you can claim either a capital works deduction or depreciation, depending on the type of improvement.
I recommend you have your property professionally managed and at the end of financial year, you will receive a financial statement that encapsulates all the financial transactions in one document.
Have your property manager pay all the outgoings, including statutory payments, body corporate and any repairs and maintenance. If you must top up their funds as expenses exceed income, this is generally easier to keep track of than random receipts.
A list of items that you can claim as immediate deductions includes:
- Cost of depreciation schedule;
- Property management;
- Statutory charges – land rates, land tax, water;
- Body corporate fees;
- Gardening, pool maintenance;
- Pest control (don’t forget to do this, particularly termite control);
- Interest on loan (not principle payments);
- Repairs and maintenance; and
- Travel to inspect or to maintain.
What you can’t claim:
- Travel expenses to visit your property;
- When you use the investment property for personal use, a holiday home or have friends or family using the home free; and
- Generally, the conveyancing costs of purchase are not tax deductible, rather they make up the cost base for capital gains purposes.
Getting a qualified quantity surveyor to prepare your depreciation schedule is the way to ensure this is done correctly.
The ATO website Residential Rental Properties contains all you will need to know and is a great reference.
While you can always do your own tax return with the use of such tools from the ATO, I recommend you invest in a property accountant, which is a tax-deductible service itself, to ensure mistakes are not made and all possible deductions are accounted for.
As I have said several times, be proactive as an investor. I often see with investors a complacency and a lack of interaction with their property manager.
An active relationship with a property manager is essential to maximise your outcome by ensuring you are aware, and can capitalise on any available opportunity to maintain and improve your asset capital value and ongoing appeal to tenants. The same is true for your accountant.
Strategy planning is an investment to gain the best long-term outcome and navigate unforeseen changes and events personally and in the market place.